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The paper studies the determinants of the interest rate spreads in Estonia, a country that stands out among European countries for its wide spreads and highly concentrated banking sector. Four distinct credit markets are considered for housing loans, consumer loans, long-term corporate loans and short-term corporate loans. The paper uses quarterly panel data from 2000Q1–2021Q1. It uses a two-stage approach to disaggregate the observed spread into a component determined by the bank-specific factors and a component determined by the market-specific factors, which is called pure spread. For each of the two components, we find substantial differences in the determinants of the spreads across different types of loan. While credit risk is important for long-term corporate and housing loans, inverse efficiency is significant in the segment of short-term loans. The contribution of market concentration to the pure spread is larger for household loans than for corporate loans. [Display omitted] • Bank-level factors contribute markedly less to interest rate spreads than market-level factors do • Credit risk is important for the spread on loans with long maturity, both for corporate and household loans • Market concentration matters more for household loans than for corporate loans • The consumer loan market shows evidence of large market imperfections leading to higher spreads • The results suggest that tailor-made policies for each credit market would be more effective at lowering the margins [ABSTRACT FROM AUTHOR]

This paper investigates the relationship between expansionary credit events and firms’ employment decisions. To overcome the endogeneity coming from the supply side of credit we exploited the legal and political framework in Mexico to examine the effects of local governments’ prepayment of loans, a situation that leads banks to channel newfound liquidity in firms. Analysis of a novel data set covering a 10-year period showed that a 1-standard-deviation increase in the issuance of new loans increases firms’ employment by 2.57 percentage points. Timing of the boost in employment varies, with smaller firms reacting immediately and larger firms reacting four months later. The effects are driven by firms in the manufacturing sector. Our results highlight the importance of the bank lending channel to stimulate employment in the short term, especially for smaller firms. Further, our estimates suggest that the effect of credit on employment could be amplified with policies that promote a more competitive corporate loan market.